With no outright majority and a hung Parliament resulting from U.K. elections on Thursday, the energy industry will be closely watching how any new government deals with the problems posed by Brexit, as well as Conservative government election promises to curb retail energy prices.
Just days after the election, negotiations with Brussels were set to get underway June 19, with many observers predicting a "hard Brexit," in which U.K.-EU trade is based on World Trade Organization rules and nontariff barriers emerge in gas and power markets.
Some observers still hold out hope of compromise — the Conservative manifesto promised to "pursue free trade with European markets."
But many in the industry now predict a further decline in the role of the U.K.'s National Balancing Point, or NBP, as the pre-eminent European gas trading hub. On the oil side, the industry's priority is maintaining stability and the U.K.'s investment attractiveness after a long struggle with low prices.
The ruling Conservative party's plans to cap energy prices could dent investor sentiment, though it remains committed to low corporate taxation overall.
The big upstream oil companies generally have benefited from the fall in the value of the pound that followed last year's Brexit vote.
Meanwhile, the U.K.-Norway energy relationship will become much more important, the EU Emissions Trading System may lose a pro-reform advocate and the U.K. refining sector could one day find itself on the wrong side of EU protectionism.
Energy trade flows
Analysis by S&P Global Platts does not foresee any short-term impact in U.K.-EU energy trade flows because, even under World Trade Organization, or WTO, rules, duty charged by the EU on imports of electricity, natural gas (gaseous and liquefied), petroleum oils, coal and wood pellets is zero.
In the years after a Brexit divorce, however, creeping regulatory divergence could see nontariff barriers begin to affect trade in both gas and power, while further decline in the role of the U.K.'s NBP versus the Netherlands' Title Transfer Facility, or TTF, seems certain.
What is at stake?
The most important question economically is the post-Brexit trading relationship between the EU and the U.K. — whether negotiations result in a "hard"' or a "soft" Brexit. Within the political context, the energy sector will play a relatively minor role, not least because it is largely tariff-free both within the EU's single market or, under a hard Brexit, under WTO rules.
The biggest risk, perhaps, is that with larger issues of politics and trade at stake, the energy industry's interests are overlooked.
Since completion of day-ahead Multi Regional Coupling in 2013, the U.K. has enjoyed implicit capacity allocation arrangements on electricity interconnectors.
A hard Brexit could force a return to explicit allocation of capacity. It would also threaten the U.K.'s involvement in the EU's Cross Border Intraday project to move from explicit to implicit market coupling arrangements for this time frame.
The U.K. government is clear that it will leave the Euratom Treaty, implying significant regulatory change and new costs to maintain nonproliferation inspections, fusion research and nuclear safety.
The impact on gas flows between the U.K. and continental Europe is likely to be muted, unless there is a new tariff system.
However, one likely outcome of Brexit is a reinforcement of the dominance over European gas pricing of the Netherlands' TTF hub, which has moved ahead of the U.K. NBP in recent years due to its liquidity on the forward curve.
In addition, as the U.K.'s domestic gas production declines, the country is expected to become ever more dependent on gas imports from Norway, as well as via the interconnectors with Belgium (IUK) and the Netherlands (BBL) and LNG.
The U.K.'s relationship with Norway will be key. It is the main supplier of pipeline gas to the U.K. and as a member of the European Economic Area adopts EU regulation in the energy sector.
The U.K. government has not indicated what it intends to do about participation in the EU's ETS.
Staying in is not likely given the European Court of Justice's governance role in the ETS, and the U.K.'s stated aim to disengage from the court's jurisdiction.
Exit would see a proactive decarbonizing nation leave a system in need of reform.
The U.K.'s fifth carbon budget in June 2016 set a legally binding 2030 target of 57% carbon abatement versus 1990 — more ambitious than the current EU target of 40%.
This commitment eased concerns that Brexit would see a watering-down of the U.K.'s leadership on climate change. In the short term, the U.K. may well seek to stay in the ETS until the end of Phase 3 (2020) to minimize disruption.
Thereafter, departure from the ETS would open the way for a range of national climate policies, given the government's stated aim to remain at the forefront of carbon-cutting initiatives.
Oil did not play much part in the election; the industry is seeking tax stability and help on some specific issues to do with the tax treatment of spending on decommissioning ageing assets.
On Brexit, majors such as BP and Shell have stayed above the fray, having earlier expressed some opposition.
Still, concerns include retaining access to specialist workers from the EU, and there are broader underlying questions about the U.K.'s future as an engineering, financial and legal hub for the worldwide industry.
Brexit raises the possibility of the EU imposing tariffs on oil product imports from the U.K., including fuels currently shipped to Belgium and the Netherlands for onward export outside the bloc.
However the EU has tended to cancel tariffs on products it is short of, such as jet fuel, and EU oil product import tariffs are relatively modest, ranging from zero to 4.7%.
Around 15 million tonnes per year of U.K. petroleum product exports, or two-thirds of the total, head to the EU, some of this being for onward export.